Don’t create Internet-tax monster

Ask any member of Congress if he or she would vote to increase the cost of Internet access to the average customer by anywhere from 10 to 30 percent and the legislator would likely laugh out loud. But if Congress doesn’t extend or make permanent the moratorium on taxation of Internet access that’s exactly what will happen. The economic impact for consumers as well as for providers will be beyond anyone’s expectation.

The sad facts about taxation on communications services are clear. Most states apply the full state sales tax to local as well as long-distance telephone service, whether wireless or wire-line. Further, in most states there are special taxes — some dedicated for specified purposes — for such things as funding of 911 services and subsidizing services for the deaf and hearing impaired.

Then, in most municipalities that levy a sales tax there is not only the full tax rate but frequently there are premium rates applied — in some cases twice the normal rate for other products. For years cities have been setting local tax rates for utilities at as much as twice the regular sales tax rate. Why? Because they can.

And to add insult to injury there are sales taxes applied by other political subdivisions such as county governments and mosquito abatement districts for such things as jails, stadiums, libraries and a host of other items. All of these items could be in the base for Internet access taxation.

But wait, there’s more — telecom taxes imposed by the federal government. Those remarkably high taxes when added to the equation more than double the aggregate rate. And this has not gone unnoticed.

In a March 2006 paper the Texas Public Policy Institute found, for example, “(the) Texas local telecom tax rate is 11.32 percent and the average state tax rate is 13.97 percent. Adding federal taxes to the mix means that the average Texan’s total telecom tax bill is just under 30 percent, almost one-third of the cost of telecommunications services.” And that is significant when measured against the 8.25 percent general business tax rate in Texas.

Another analysis of municipal taxes included in a recent extensive study of telecom taxes by the Heartland Institute noted, “The burden on all communication services ranges from a low of $10.93 (5.81 percent) in Lansing, Michigan, to a high of $30.22 (16.06 percent) in Tallahassee, Florida.”

When telecommunications services consisted of only wire-line service provided by Ma Bell policymakers didn’t think twice about applying disproportionate tax rates to telephone service — a captive industry. And the telephone monopoly quietly acquiesced and passed it through to the end user. Over decades this expanded to confiscatory levels.

By allowing the moratorium to expire Congress is enabling the states and their political subdivisions to raise hundreds of millions of dollars in new tax revenue on Internet access. This from the same Congress that moans about protected classes’ ability to afford these services. If economically depressed and protected-class Americans want to be further separated from the Internet let them just have to face price increases of up to 30 percent. And make no mistake, it will happen and it will happen quickly. The laws and ordinances are already written and policymakers drool over the thought of the new revenue they’ll receive.

Before Congress permits this behavior it should consider the impact on Internet usage and Americans’ ability to pay for what has become a virtual minimal amenity of life. Or maybe Congress likes the reputation it has with the American people — heck, this could drive its approval ratings into single digits.

Aarons is a senior fellow at the Institute for Policy Innovation, based in Dallas.